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This Biotech Thinks It's Cheap

But do investors feel the same?

Amgen(Nasdaq: AMGN) thinks its investors aren't valuing the company properly. It's offering to repurchase $5 billion worth of stock -- about 10% of its value -- and even willing to borrow the cash to get it done.

The Dutch auction allows investors to name their price between $54 and $60 that they're willing to sell their shares for. Once all the tender offers are in, Amgen will start at the lowest price and count up until it reaches a price that would allow it to repurchase $5 billion worth of shares. Shares tendered above that price will be retained by the investor, and those tendered for the lower prices will be repurchased by Amgen at the price required to repurchase $5 billion in shares.

Thus, you could tender your shares at $54 and end up selling them at $60 if that's the price required to get enough shares. Conversely, you could tender at $55 and not end up selling your shares if enough investors were willing to sell for $54.99 or less.

Investors have a complex decision to make. If you think shares are overvalued at a price between $54 and $60, tendering the shares is certainly an option. Selling on the open market is another option if the price is fairly close to the $60 ceiling that Amgen is willing to pay. If neither of those works, you could always sell a covered call, generating cash with the possibility of selling at a higher price.

But it might make most sense to just hold onto your shares. Retiring shares -- even if it requires taking on debt -- looks like a good financial move for shareholders who stay. Amgen is trading at 10 times its free cash flow over the past 12 months. As long as the company pays less than 10% interest on the cash it borrows to fund the share repurchase, it should be able to decrease its valuation ratio by retiring shares. Considering the cost of corporate borrowing recently, that shouldn't be too difficult.

While it looks like Amgen is making a good financial move with the buyback, one has to wonder whether repurchasing shares will provide a better long-term return for investors than buying a development-stage drugmaker or five. With $5 billion, Amgen could purchase Exelixis(Nasdaq: EXEL), Keryx Biopharmaceuticals (Nasdaq: KERX ), Aeterna Zentaris(Nasdaq: AEZS), Dendreon(Nasdaq: DNDN), andSeattle Genetics(Nasdaq: SGEN), even factoring in a 25% premium for the companies. Amgen's shares are cheap, but it looks like it's gotten a little conservative in its old age. Investors interested in swinging for the fence might as well tender their shares.